Emerging markets respond as macro-climate shifts

Hungary’s central bank has cut rates in a twist in the broader trend of policy tightening that has engulfed emerging markets since January.
Photo: Reuters

by
Vesna Poljak

Hungary’s central bank has cut rates in a twist in the broader trend of policy tightening that has engulfed emerging markets since January as the United States withdraws liquidity and tensions flare between developed and developing economies.

The Magyar Nemzeti Bank reduced rates on Tuesday just as Turkey – which rushed to hike last month – kept settings unchanged. Significantly, ­Hungary is running a current account surplus and Turkey is in deficit, making the lira vulnerable and creating an inflation problem for Turkish policymakers. Hungary’s decision shows the central bank does not want to risk interrupting an economic recovery, experts say, but it does not characterise the prevailing mood of emerging markets.

India and South Africa are among other economies which have raised rates this year as the macro-climate shifts in response to the US and a slowdown in China. A return to growth in developed markets has ignited tensions in emerging markets that will be a focal point for this weekend’s Group of 20 meeting of finance ministers and central bankers in Sydney.

National Australia Bank chief economist for markets Rob Henderson said it was clear the Federal Reserve’s actions had a spill-over effect outside of the US and emerging economies were still coming to grips with that.

AFR
AFR

“[The Fed are] still stimulating the economy but markets tend to be forward-looking so investors are looking to the day when the Fed will stop adding more stimulus.

“Eventually if the economy keeps going they’ll have to start tightening," he said.

“Overlaying that you’ve got all these country-specific issues . . . The true fact of the matter is the Fed is really focused on the domestic economy and not on these emerging economies, so I think they’ve got every right to complain but in the end it’s up to their own policymakers to respond."

On Tuesday, China tightened ­liquidity by conducting a repurchasing program for the first time since June, however economists put this down to an excess of cash flowing through the economy after the lunar newyear and not a dramatic policy shift.

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The Bank of Japan signalled it is open to further stimulus injections later this year after it renewed a small policy designed to stimulate lending by households and businesses but left its quantitative easing program unchanged following its February meeting.

Nomura
economist
Peter Attard Montalto
said he could not come up with a “serious proposal at a ­pan-national level for any form of co­ordinated response beyond rhetoric" that would serve as a fix for the volatility emerging markets are faced with.

“There is simply not enough of a crisis in [emerging markets] at present for [international financial institutions] or [developed markets] to accept the need for global rebalancing to be altered – the case from some more exposed EMs is seen as too flimsy . . . It looks likely that EMs will remain dependent on their own policy options to address their own actual (and perceived) vulnerabilities," he said in report to clients.